ESG and Firm Performance: Focusing on the Environmental Strategy

Abstract

In this study, we investigate whether firms’ eco-friendly strategies affect their value. For the analysis, we study 210 firms in the Republic of Korea. These firms were listed on the Korea Composite Stock Price Index and the Korea Securities Dealers Automated Quotations during 2017–2021. We measure the dependent variable by return on assets, return on equity, and Tobin’s Q as firm value and use the ordinary least square estimation. The results show that firms’ eco-friendly strategies have a positive effect on firm value. Additionally, we examine the effect of eco-friendly strategies on performance by industry and by duration. In the nonservice industry, there is a positive effect of environmental strategy on firm value for a 5-year window, but not for a 3-year window. In the service industry, in contrast, eco-friendly strategies have no effect on firm value for the 5-year window but have positive effects for the 3-year window. In the robustness check, for the endogeneity issue, we perform a two-stage least squares analysis. This study demonstrates that environmental actions are reflected in firm value and that the performance varies by industry. Thus, these results provide critical insights for managers and policy makers who consider the environmental issues of firms.